Owning a home provides numerous financial and tax advantages. To take full advantage of them each year – especially at tax time! – it is crucial that homeowners maximize these breaks.
IRS allows taxpayers who itemize their deductions to deduct state and local taxes, property taxes, mortgage interest payments and health insurance costs – potentially saving homeowners thousands at tax time.
1. Mortgage Interest
The mortgage interest deduction is one of the most appealing tax breaks for homeowners, allowing you to deduct interest paid on both a primary home and second home up to certain limits. But you must itemize deductions and be eligible before taking advantage of it.
Mortgage points, late fees and prepayment penalties can also be deducted, although note that only the amount actually paid over an annual period will count toward deduction.
Mortgage interest deduction is an important incentive for homeownership, yet its effects appear limited in their expansion. Most of its benefits go to households in higher income brackets where purchasing homes tends to be easier while middle and lower-income households typically face greater challenges when trying to buy a house.
2. Property Taxes
Property tax deductions provide homeowners with an opportunity to deduct state and local taxes paid on the assessed value of their homes from federal income taxes, both annual property taxes as well as those due at closing during sale/purchase transactions. It applies only if individuals itemize their taxes.
Due to a doubling of the standard deduction in 2018, it’s estimated that fewer homeowners qualify for property tax deduction. But if you itemize and can still claim it, doing so could save thousands!
If your property taxes are paid through an escrow account, it’s essential that you understand that only the portion that corresponds to real estate taxes qualifies for tax deduction. Other charges on your escrow statement, such as fees for water or sewer services are ineligible for this deduction; an experienced tax advisor can help maximize this benefit.
3. Homeowners Insurance
Homeowners insurance typically isn’t tax deductible. But, there may be exceptions if you rent out your home or operate a business from it.
Under certain conditions, homeowners can deduct part of their homeowners insurance premiums when filing taxes as a deduction. A qualified tax advisor should be consulted in order to assess whether this deduction could benefit a policyholder.
Standard homeowners’ deductible amounts range between $1,000 and $2,000. Many homeowners opt for higher deductibles to save money on premiums; this strategy may help lower insurance costs but only if there are sufficient financial resources to pay a higher deductible if filing a claim arises; otherwise, premium savings would likely be offset by out-of-pocket expenses associated with filing claims; annual savings may often more than cover this increase, allowing them to invest their savings toward increasing property values or home improvements.
4. Home Improvements
When considering home improvements such as painting or renovating the kitchen, it’s important to keep in mind that not all are tax deductible. According to the IRS, only capital improvements that increase value, extend lifespan or adapt to new uses qualify as deductions.
Additionally, capital improvements include things such as installing a swimming pool or solar panels on one’s house and building wheelchair ramp. However, new drapes don’t meet this definition because they don’t contribute to prolonging a house’s life span.
Accurate record-keeping is key when calculating tax deductible costs, such as receipts, invoices, purchase orders and canceled checks as proof of expenses. Working with a tax professional or accountant who specializes in your field can offer tailored guidance regarding specific deductions, exemptions and credits applicable to you – and financial advisors can assist in planning future home renovation projects that maximize savings while remaining compliant with law.
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